Part IV: Gold,
Manipulation and DominationThis article appeared in AToL
on October 2, 2008

The Illegal Gold
Trade

All over the world, trade in gold had been the favored
device for evading national foreign exchange controls from the end of
WWII to
1971. In 1946, the Bretton Woods regime adopted in 1944 became
operational,
thereby forbidding the importation of gold for private speculative
purposes in
signatory nations. Britain
was a signatory but Portugal
was not. Thus a gold-smuggling operation between Portugal
colony Macau and British colony Hong
Kong
flourished until 1974, two years after the United
States took the dollar off gold, in
effect
abolishing the Bretton Woods system of fixed exchange rates, when Hong
Kong abolished a law that requires a special license to
import
gold for re-export. The tiny Portuguese colony of Macau
became one of the world’s biggest importers and re-exporters of gold
during
this period.

Instability in the exchange value of the British pound sterling
in the late 1960s pushed Hong Kong, a British
colony
since 1841, to switch to a gold-backed US dollar pegged at $35 per
ounce of
gold. Hong Kong trading firms bought gold legally on the London gold
market
beyond the reach of US law forbidding private purchase and ownership of
gold on
US soil, at a pegged price of $35 per ounce, then passed it along to
Macau gold
syndicates for a service charge to recast the gold into physical shapes
suitable for smuggling to be smuggled back to Hong Kong to sell for
above-peg
prices to be use to finance transactions around the world out of range
of
Bretton Woods regulations.

From
1960 to 1980, Turkey
strictly regulated the flows of gold in and out of the country. The
government
passed law on the “Protection of the Value of Turkish Currency” to
control gold
smuggling. During this period, the price in the domestic was around
US$12/ounce
higher than in international markets. Before 1980, when
importing
gold was prohibited, smuggled gold volumes into the country reached 80
tons a
year. In 1980, together with general policy change on
liberalization and
globalization, the foreign exchange market and a number of commodity
markets
were deregulated. In 1985, the central bank was given responsibility
for
importing gold against the Turkish Lira. During this period, the
average price
difference between the domestic and international markets decreased to
US$7.65/ounce. In 1993, further liberalization ended the central bank’s
monopoly, and allowed gold bullion imports and exports by authorized
market
participants on a declaration basis. In 1992, the average price
difference
between the domestic and international markets decreased to
US$1.28/ounce. The
opening of the Istanbul Gold Exchange (IGE) on July 26, 1995 and the price difference
between domestic
and international markets decreased still further to US$0.72 /ounce.
This meant
that Turkey
citizens were paying less for gold but the Turkish currency was
appreciating as
the money supply shrank to slow the economy.

In 1939, at the start of WW2, gold imports into British
India
were controlled or banned. This British legacy of colonial
exploitation was continued by Indian Government. Gold control laws were
enacted
which stopped all legal gold imports into India.
Gold smuggling continued the gold traffic. Gold control laws corrupted
four
generations of Eden-Ox-bridge trained Indians government officials and
politicians, making gold expensive in relation to Indian income and
kept
Indians in poverty longer.

Overseas Drain of
Gold from the US

By 1971, US gold stock had declined by US$10 billion, a 50%
drop. At the same time, foreign banks held $80 billion, eight times the
amount
of gold remaining in US
possession. Growing US
balance-of-payments deficit meant that foreign governments were
accumulating
large amounts of dollars -- in aggregate volume far exceeding the US
government's stock of gold. The central banks of these governments
could show
up at any time at the gold window of the US Treasury and insist on
trading in
their dollars for gold, which would precipitate a run on the US gold
reserve.

The issue was not theoretical. By the 1960s, many foreigners
were buying gold at an artificially low price of US$35 set by Bretton
Woods and
sold it in the black market for easy profit. The result was that the US
began to bleed gold through her fiscal and trade deficits and by the
increasing
amount of dollars sent overseas, know as euro-dollars. France
under Charles de Gaulle realized that this trend was unsustainable. The
US
was printing more dollars than its gold holding could support and
dumping the
dollars in world markets.

To deal with the problem, President Kennedy approved the
suggestion of newly-appointed Undersecretary of the Treasury Robert
Roosa that
the US, Britain, France, Germany and other European nations pooled
their gold
resources to prevent the commercial price for gold from exceeding the
Bretton
Woods mandated rate of US 35 per ounce. Acting on this suggestion, the
Central
Banks of the US,
Britain,
West Germany,
France,
Switzerland,
Italy,
Belgium,
the Netherlands,
and Luxembourg
set up the “London Gold Pool” in early 1961.

The London Gold Pool came unstuck when France
under Charles de Gaulle pulled out and began to send the dollars earned
by
exporting to the US
back to the US
and demanding gold rather than Treasury debt paper in return. Under the
terms
of the Bretton Woods Agreement signed in 1944, France
was legally entitled to do just that. As the drain on US Gold became
acute, the
London Gold Pool folded in April 1968 because it did not command enough
gold to
support the price at $35 per ounce. The demand by foreigners for gold
held by
the US
surged.

George Pompidou, then as prime minister under de Gaul and
later French President observed: “The international monetary system is
functioning poorly because it gives advantages to the country issuing
the
reserve currency. Such a country can have inflation by making others
pay for
it.”

John Connally, Treasury Secretary under President Richard
Nixon, had told foreign finance ministers that “the dollar was America’s
currency, but your problem.” To solve the problem, France
redeemed its dollar holdings in gold in early August, 1971 by sending a
French
battleship to New York
to take
delivery of French gold from the vault of the New York Federal Reserve
Bank and
to bring it to the vault of the Banque de France in Paris.
The French raised gold reserves and dumped dollars. Banque de France
eventually
increased its gold holding to 92% of its reserves.

Even Britain,
the ally with a “special relationship” jumped the monetary ship. On August 11, 1971, the British
ambassador in Washington
received
instructions from London
to go to
the Treasury Department to request the conversion of $3 billion into
gold and
to have it moved from the United States
Bullion Depository at FortKnox
to the underground vault of the New York Federal Reserve Bank where
foreign
government gold was stored. US gold reserves had dropped from 20,000
tons to
8,500 tons (32,150 troy ounces =
1 metric ton). At $35 per
ounce, 8,500 tons of gold had a cash value of $9.56 billion. Four days
later, on August 15,
1971, President
Nixon announced that the United States
would no longer redeem dollars for gold, making it the final step in
abandoning
the gold standard.

The breakdown of the Bretton Woods monetary system in 1971
was precipitated by short term capital movements out of the dollarinto
the
key European currencies, leading to the floating of the rising German
markand
the Dutch guilder. But the long standing payments deficit of the US
and her deteriorating current account and fiscal account since 1965
were the
fundamental causes. At first
the short term capital flows of early 1971 signaled the reverse of the
great
floods of money that had moved to the US
between 1969 and 1970 when the US
business cycle peakedand the Federal Reserve made concerted
effort belatedly
to restrain the growth of the money supply. The combination of
inflation momentum
and abrupt tight money pushed interest rates to unconstructive levels.
As
usual, Fed response on dated incoming data caused its time-lagged
response to
overshoot, exacerbating volatility. This is known in the market as the
Fed
always falling behind the curve.

When real data on the US
business cycle topping out finally became visible, the Fed again
belatedly
eased monetary policy excessively to cushion the fall already in
process. As
frequently in previous crises, the time lag of the effect of Fed
actions on
market behavior caused the Fed to overshoot both coming and going.
Dollar rates
dropped precipitously in November 1970 and money flooded back to Europe
like a tidal wave. The flow at first only reflected interest rate
differentials, but as always, interest-rate-driven flows induced
speculative
runs.

The massive rush of funds into Germany
threatened to undermine Bundesbank efforts to contain inflation in Germany.
The German central bank opted to suspend the fixed exchange rate of the
mark
and allowed it to rise against the dollar to fight domestic inflation,
against
which Germans have a historical phobia. A similar sequence of events
ensued in
the Netherlands.
The flight from the dollar continued and eventually accelerated. US
gold reserves
were visibly inadequate to maintain even the semblance of
convertibility,
forcing Nixon to close gold convertibility to foreigners. After the
gold window
was formally closed, the major currencies either floated or were
shielded
against further dollar inflows by capital controls.

The Silver Hunts

The family of Texas
oil patriarch HL Hunt was one of the richest in America.
The sons, Nelson Bunker and William Herbert, played a very significant
role in
the discovery and development of the oil fields in Libya
which were later nationalized by order of Muammar al-Gaddafi. In 1973,
the Hunt
brothers decided to buy precious metals as a hedge against inflation.
Gold still
could not be legally held by private citizens at that time, so the
Hunts began
to buy silver in large quantity. By 1979, the Hunt Brothers, together
with
wealthy Mid East investors, controlled a pool of more than 200 million
ounces
of silver, equivalent to half the world’s deliverable supply.

When the Hunts began accumulating silver back in 1973, the
price per ounce was in the $1.95 range. By early in 1979, the price had
risen
to $5. By September 1979, the price reached $11. But in January 1980,
the price
went to the $50 range, peaking at $54. Gold hit an all time high of
$850 in
1980, making the silver/gold ratio at 15.74/1, very close to the
historical
ration of 15/1. It looked like that the Hunts were restoring the gold
standard
with bimetal ratio.

Once the silver market was cornered by the Hunts, outsiders
joined the chase. The Hunts and other silver traders were financing
their
silver buys and holding with bank loans in futures contracts. A
combination of
changed trading rules on the New York Metals Market (COMEX) and the
intervention of the Federal Reserve punctured the speculative bubble on
silver.
The price began to slide, culminating in a 50% one-day decline on March 27, 1980 as the price
plummeted
from $21.62 to $10.80. As the price of silver fell, the Hunt Brothers
were
unable to meet a $100 million margin call.

The collapse of the silver market meant countless losses for
speculators. The Hunt brothers declared bankruptcy. By 1987 their
liabilities
had grown to nearly $2.5 billion against assets of $1.5 billion. In
August of
1988 the Hunts were convicted of conspiring to manipulate the silver
market.

Soviet Monetary
System

The ruble has been the Russian unit of currency for about
500 years. From 1710, the ruble was divided into 100 kopeks. The amount
of
precious metal in a ruble varied over time. In a 1704 currency reform,
Peter I
standardized the ruble to 28 grams of silver. While ruble coins were
silver,
higher denominations were minted in gold and platinum. By the end of
the 18th
century, the ruble was set to 18 grams of silver or 1.2 grams of gold,
with a
ratio of 15:1 for the values of the two metals. In 1828, platinum coins
were
introduced with 1 ruble equal to 3.451 grams.

On December 17, 1885,
a new standard was adopted which reduced the gold content to
1.161 grams, pegging the gold ruble to 4 French Franc. This rate was
revised in
1897 to 1 ruble = 2⅔ francs or 0.774 grams gold. With the outbreak of
the WWI
in 1914, Russia
dropped the gold standard and the ruble fell in value to caused
hyperinflation
in 1920s. Between 1921 and 1922 inflation in the USSR
reached 213%. In 1992, the first year of post-Soviet economic reform,
inflation
was 2,520%, the major cause being the decontrol of most prices in
January. In
1993 the annual rate was 840%, and in 1994, 224%. The ruble devalued
from about
40 r/$ in 1991 to about 30,000 r/$ in 1999. In 2008, the Russian Rubble
exchange rate is about 25.5 rubbles to a dollar. Russia’s
inflation rate in 2008 is around 3.2%.

Following WWII, the Soviet government implemented a
redenomination of the currency to reduce the amount of money in
circulation.
This only affected the paper money. Old rubles were revalued at one
tenth of
their face value. The 1961 redenomination was a repeat of the 1947
reform, with
the same terms applying. The Soviet ruble of 1961 was formally equal to
0.987412 gram of gold, but similar to the US,
the exchange for gold was not available to the general public.
Following the
breakup of the Soviet Union in 1991, the ruble
remained
the currency of the Russian Federation.
New set of banknotes was issued in the name of Bank of Russia in 1993.
During
the period of high inflation of the early 1990s, the ruble was
significantly
devalued.

Soviet Rejection of
the Marshall Plan

The Marshall Plan was more than an aid program to help Europe
recover from war damage. It sought to restructure Western European
economies
away from its prewar socialist direction and launch them on a new path
towards US
style market capitalism based on a new monetary regime of a gold-backed
dollar
and to keep budding European social democracy from mutating into
populist
communism through elections. The strategic geopolitical purpose was to
integrate Western Europe firmly into postwar
Pax
Americana of free market fundamentalism and a regional military
alliance in the
form of North Atlantic Treaty Organization (NATO) based on collective
security,
having rejected the lesson of the role of interlinked alliances in
igniting
WWI. The Marshall Plan was the linchpin of US
strategy to neutralize a perceived rising Soviet threat. It helped to
trigger
the Cold War.

The Soviet leadership responded to post-Roosevelt US
policy based on Soviet experience with the West before, during and
after the
Second World War. This experience led Moscow
to a policy that was not simply fuelled by a conditional reflex of
anti-Americanism which during the Roosevelt era
had been
kept in deep abeyance. The Munich Pact followed Franco-British
rejection of two
successive Soviet offers (in 1934 and 1937) to form an alliance against
Germany
in Europe and Japan
in Asia, thus pushing the USSR
to enter the Soviet-German Non-aggression Pact of August 23, 1939, less than a year after Munich.
From the Soviet perspective, Munich
was a Western scheme to turn Nazi aggression eastward and use German
fascism to
counter Soviet communism. The Soviet-German Non-aggression Pact was an
attempt
to turn the table back against capitalism by freeing up fascism against
it.

Munich
convinced the USSR
that the Western powers were pursuing a policy of selective appeasement
only
toward German eastward expansion and were not interested in joining the
Soviet Union in an
anti-fascist alliance promoted through a popular
front. In addition, there was concern about the possibility that Britain
and France
would stay neutral in a war initiated by Germany
against the USSR,
hoping that the two warring Eastern powers would wear each other out
and put an
end to both the Bolshevik Soviet Union and Nazi Germany. In this sense,
Munich
was less a strategy of appeasement to secure peace than a Western
capitalist
democracy strategy of directing war eastward between fascism and
communism.See my April 28, 2007 article: Beyond Munich:
Geostrategy and Betrayal

The fact that the Western powers had not yet opened a second
front (and would not do so until June 1944) was giving the USSR
reasons to seek a separate peace with Germany.
Churchill and Roosevelt were fully aware of this possibility.
Throughout
1938-39, Churchill refused to pledge that it would cease hostilities
against Germany
in the event of an internal coup to topple the Third Reich. This policy
is known
as “absolute silence” in British diplomacy. When Roosevelt and
Churchill met at Casablanca
in January 1943, the
idealistic US
president emerged from the meeting to tell the world that the US
and Britain
would accept nothing short of unconditional surrender from Germany.
Roosevelt needed to do this
because he was aware that
the US
public
did not go to war to save old Europe, only to
save the
world from tyranny. Churchill was flabbergasted and later claimed that
he had
not been consulted but had to go along for the sake of the Atlantic
Alliance.
Churchill had in the back of his mind the use of Germans to resist
post-war
communist incursion into Europe, and was
interested in
preserving the Wehrmacht for that purpose. He knew that no Wehrmacht
officer
would support a coup against Hitler only to have his country invaded,
occupied,
and humiliated by the Allies that included a communist power. For the
German
military, better to stand by Nazi Germany, even if it meant following
Hitler’s
madness toward total destruction, than to commit such dishonorable high
treason. But Roosevelt, driven by US public
opinion,
left Churchill no room to maneuver. Unlike Churchill, Roosevelt
saw the possibility and merit of peaceful co-existence between
capitalist and
communist nations and did not look forwards with relish to the need or
value of
a Cold War.

Coming when it did in January 1943, the same month the German 6th Army
surrendered at Stalingrad, the Roosevelt unconditional surrender
proclamation
prompted Ulrich von Hassel, who had used his international contacts to
arrange
secret meetings with British and American officials, and had hoped that
a
successful coup would translate into an honorable peace treaty with
Britain and
the US, to conclude that the unconditional surrender proclamation had
bailed
out Hitler from domestic opposition over his military disaster at
Stalingrad.

Roosevelt’s unconditional
surrender
demand had its own logic. For Roosevelt, it was
vital
not to give Stalin any incentive that would tempt him to strike a
separate deal
with Germany
that would lead to a separate peace. In WWI, Generals Paul Von
Hindenberg and
Erich Ludendorff had pulled off such a separate peace with new Soviet
Russia in
early 1918, but it came too late to allow them to move their forces
westward to
smash the Anglo-French lines before US forces arrived. For WWII, it was
very
likely that the Allies might never have won if Stalin, having regained
the 1939
Soviet border, suddenly backed out of the war to allow German forces on
the
Eastern Front to be divert towards the West. Moreover, the United
States was eager to get the Soviet
Union to declare war on Japan
to reduce projected heavy US
casualty since the Manhattan Project to develop the atomic bomb was
still years
away from completion in 1942 and success had not been totally
guaranteed.

On June 5, 1947,
Secretary of State George C. Marshall spoke at HarvardUniversity
and outlined the
Marshall Plan. Europe, still devastated by the
war, had
just survived one of the harshest winters on record. The nations of Europe
had nothing to sell for hard currency with which to buy food and fuel,
and the
postwar social democratic governments in most countries were unwilling
and
unable to adopt the draconian proposals for recovery advocated by
old-line
classical market economists. Something had to be done, both for
humanitarian
reasons and also to stop the potential spread of communism in Western
Europe.

The US
offered for European relief up to $20 billion ($200 billion in 2008
dollars, or
10% of its GDP which would come to $1.4 trillion in 2008), but only if
the
European nations could get together and draw up a plan to act as a
single
cooperative economic unit. Marshall
also offered aid to the Soviet Union and its
allies in Eastern Europe, but Stalin denounced
the program as a trick to spread
market capitalism in the Soviet Unions and refused to participate.
Ironically,
Soviet rejection made passage of the Marshall Plan through Congress
possible.
In 1947, anticommunism in the US
was much stronger than anti-Americanism in the Soviet Union.

While Europe was devastated by war,
the US
was
blessed with record-breaking wheat harvests in 1944 and 1945. Its
defense
industry had produced for the war 196,000 aircraft, with 96,356 in 1944
alone,
and more than 40 billion bullets. In 1943 alone, the US
produced 19 million tons of merchant ships, up from prewar production
of
600,000 tons. Gross national product (GDP) doubled from less than $100
billion
in 1940 to more than $200 billion in 1945. Corporate profits also
doubled from
about $6 billion in 1940 to $12 billion four years later. By 1944, the US
was able to spend on war more than her entire national income in all
previous
time in peace. More than $50 billion of lend-lease goods were sent to
allies,
mostly to Britain
and to a lesser amount to the USSR.
US
national
income tripled to $198 billion by the end of the war from $72 billion
in 1939.

Unlike the rest of the war-torn world, the US
had never had it so good, which left the national psyche with greatly
reduced
phobia against war. For the US
public, war meant prosperity and inspiring entertainment as portrayed
in Hollywood
war movies. Operationally, both WWI and II were limited wars for the US
fought only on foreign land. The positive socio-economic impacts from
these two
world wars left the US with a cavalier mentality for future limited
wars, first
Korea, the Vietnam, then Kosovo, then Iraq, then Afghanistan, then Iraq
again
and possible Iran before long.

In one stroke, WWII swept away the blight of economic
depression that had afflicted the US
for 12 stagnant years before Japanese attack on Pearl Harbor.
Roosevelt’s lowest
unemployment rate during the New
Deals years was still over 14%. In 1945, the unemployment rate was
close to 1%,
even with a much larger labor force, adding 30% more workers to the
total
workforce of 64 million, including 3 million housewives. Regional
economic
disparity was moderated. The depressed South received a
disproportionate volume
of defense contracts, including nearly $6 billion of federally financed
industrial facilities. Wartime federal spending gave birth to the Sun
Belt of
new high-tech manufacturing, ironically a region that would in time
form the
electoral base for ideological assault on government intrusion in the
economy.
The National Bureau of Economic Research showed that whereas in 1929,
the
richest 1% received 16% of the national income, in 1948, they received
only 8%.
WWII has a significant effect on the equalization of income and wealth
in the US.
But economic democracy did not last long. In 2007, the richest 1% in
the US
received 22% of the national income. The top marginal income tax rate
in 1947
was 86.45% while the top rate in 2008 is 35%. The highest rate was 94%
in
1944-45. Any way you cut it, the rich in the US
have been favored by the government soon after WWII ended. Economic
democracy
receded soon after the war to defend democracy ended.

WWII amplified to unprecedented proportions the intrusive
role of the federal government in US
society in the process of defending freedom abroad. After the war, the
Federal
Bureau of Investigation (FBI) turned from a federal agency against
organized
crime to one that routinely violated the civil rights of large number
of
citizens in its mission to protect freedom. Ideological witch hunts
were
conducted in all levels of society, reaching even to the highest level
of
government, culminating in General Marshall
being accused of being a communist sympathizer.

WWII turned the US
into a superpower at the expense of European powers, allies and enemies
alike.
The nation that had entered the war to protect the weak and the poor of
the
world abandoned the purpose of the “good war” after the death of
Franklin D.
Roosevelt, its great populist leader, and turned its support towards
preservingpost-war Western colonialism in
the name of
anticommunism. Harry S. Truman, an insecure leader who became president
by
default, allowed himself to be manipulated by Winston Churchill not
only to see
communism as an evil ideology, but also as an opportunity to exploit
anticommunism to collect the geopolitical dividends of victory. It
nurtured US
“exceptionism” in foreign policy and gave the young nation a messianic
mission
of enlarging democracy and Christian values around the world, to
distant lands whose
names most US
leaders could not pronounce properly and most US
citizens had never heard of in their daily lives. The postwar US began
to view
itself as God’s new chosen nation and marveled at its own holy
perfection. It
transformed itself into the role of “the indispensable nation” as a
justification for hegemony. The only challenge to postwar US
hegemony came from its former wartime ally, the Union
of Soviet Socialist Republics, the
evil
empire, as President Reagan later came to call it.

The opening salvo of the Cold War was Soviet rejection of
the Marshall Plan. The Marshall Plan, in saving Europe
from war-induced starvation, also saved the US
economy from a repeat of the postwar depression of WWI.The financial aid was denominated in US
dollars, to be used to buy goods from the US
shipped across the Atlantic on US merchant
vessels. By
1953, the United States
had pumped $13 billion into the Marshall Plan account, moderating the
adverse
impact of military demobilization on the US
domestic economy. Moreover, the Plan included former arch enemy West
Germany, which was thus reintegrated
into
the European community. It neutralized war reparation normally required
of a
vanquished country through the division of the German nation into
capitalistic
West and socialist East.

More significantly, the Marshall Plan established the US
dollars as the reserve currency for intra-European and international
trade and
laid the economic foundation for gold-backed dollar dominance which
turned into
a fiat currency after Nixon closed the gold window in 1971 and emerged
as
dollar hegemony with globalization of finance after the end of the Cold
War.Aside from helping to put Europe
economically back on its feet, the Marshall Plan led to the Schuman
Plan, the
Coal and Iron Community and the Common Market, and pointed to what may
yet
evolve into an economically and politically united Europe.
The Schuman Plan in turn led to the European Atomic Energy Community
(Euratom),
which was signed (along with the EEC Treaty) in Rome on 25 March 1957,
and
entered into force on 1 January 1958. It wasone
of the founding treaties of the EU, which called for support for
nuclear power across the EU and is the only Treaty which supports the
development of a particular energy source. However, currently in the EU
seven
Member States do not have nuclear power, while four more have the
political
objective of phasing out their nuclear power programs. Throughout the
EU there
are no reactors under construction. Despite this the Euratom Treaty
remains.

Soviet policymakers understandably viewed the Marshall Plan
as a US
strategy to exploit the war-ravaged conditions of Europe
to establish US
domination through monetary imperialism. To Soviet leaders, the
Marshall Plan
was a realpolitik strategy cloaked in
humanistic ideals. The USSR
rejection of the Marshall Plan turned the Cold War into economic
position
warfare.

While
US policies militarily assumed a defensive the geo-strategic position
against
communist expansionism, its economic policies took on aggressively
assertive
initiatives designed expand the reach of the capitalist system
throughout the
world.From this perspective,
Soviet
rejection of the Marshall Plan was a natural response of a socialist
state
trying to resist external market pressure and internal revisionist
agitation
for reintegration of hard-won socialism back into the capitalist
Western
economy, and the subordination of new socialist nations to new
domination by
the capitalist West.

In 1947, economist
Evgenii Varga proposed the notion
of a “Third World” which would be a decisive
arena of
opportunity and conflict in the post-WWII era. The First
World
was occupied by the two superpowers: US and the USSR,
and Second World was occupied of the major
powers who
were allies of either the two superpowers. The main arena of
opportunity and
conflict was in the Third World countries in Asia,
Africa, and Central and South
America.
Since WWII, all limited wars, some lasting longer than the World Wars,
have
been fought in the Third World

The Soviet
leadership viewed the Marshal Plan as an attempt to use economic aid
not only
to consolidate a Western European bloc, but also to undermine
recently-won, and
still somewhat tenuous, Soviet geopolitical gains in Eastern
Europe.
It feared that the US
economic aid program sought to transform the new chain of
Soviet-oriented
buffer states into a revamped version of the “cordon
sanitaire” of the interwar years. The Plan appeared to aim
at the reintegration of Eastern Europe into the
capitalist economic system of the West, with all the political
ramification
that implied. Thus the Marshall Plan, conceived by US policymakers
primarily as
a defensive measure to stave off economic collapse in Western
Europe
to keep communism from electoral triumph in European domestic politics,
proved
indistinguishable to the Soviet leadership from an offensive attempt to
subvert
Soviet security interests.

The
Marshall Plan was openly offensive in that its authors, notably George
F
Kennan, whose writings formed by basis of the Truman Doctrine to
support any
nation economically and militarily to prevent their falling under
Soviet
control, did indeed aim at luring some of the Eastern European states
out of
the Soviet orbit and integrate them into the Western European economy.In this sense, the economic motives
behind the
Marshall Plan were undeniably more than just a geo-strategy to counter
Soviet
expansionism. It was rather a plan to constrict and reduce socialism in
Eastern Europe.

In
conversations with Harold Stassen, Stalin particularly focused his
queries on
the possibility of government intervention heading off a future
economic
crisis. And he seemed more optimistic than Stassen that such
intervention could
succeed. Stassen, a Roosevelt Republican who lost the nomination as
Republican
candidate against Truman in the 1948 presidential election to Thomas
Dewey, ran
for president a total of nine times, the last being in 1992. Stassen
delivered
the keynote address at the 1940 Republican Convention to help secure
the
nomination for Wendell Willkie, when Senator Robert Taft of Ohio
stressed that the US
needed to prevent the New Deal from using the international crisis to
extend
socialism at home.Had Stassen received
the Republican nomination in 1948, he might have defeated Truman to
reach an
understanding with the Soviet Union to prevent
the Cold
War.

Time Magazine in its Monday, May 12, 1947 edition reported:
Last week, Harold Stassen,
peripatetic Republican presidential candidate, disclosed the full
report of his
recent conversation with Russia’s
Generalissimo Joseph Stalin. It went something like this:

Stassen:
Generalissimo Stalin ...
I would be interested to know if you think [our] two economic systems
can exist
together in the same modern world in harmony. . . .
Stalin: Of course, they can. . . .
Stassen: . . . There have been
many statements about not being able to cooperate. Some of these were
made by
the Generalissimo himself. . .
Stalin: It's not possible that I
said that the two economic systems could not cooperate. . . .
Stassen: The statements I referred
to are those made by you at the 18th Communist Party Congress in 1939
and the
Plenary Session in 1937—statements about "capitalist encirclement"
and "monopoly. . . ."
Stalin: There was not a single
Party Congress or Plenary Session ... at which I said or could have
said that
cooperation between the two systems was impossible.
Stassen: I had an informal talk
with Mr. Molotov . . . and it developed into an invitation to visit Russia
on the occasion of my trip to Europe.
Stalin: Things are in very bad
shape in Europe as a whole. Is that true?
Stassen: Yes, in general, but
there are some countries . . . Switzerland,
Czechoslovakia—
Stalin: Those are small countries.
. . .
Stassen: The low production of
coal in the Ruhr has caused a shortage of coal
throughout Europe.
Stalin: Yes. It is very strange. .
. .
Stassen: It is fortunate that we
have had such large production of coal in the United
States. . . .
Stalin: Things are not bad in the United
States.
Stassen: Our [the U.S.]
problem now is to see to it that we do not have a depression, an
economic
crisis.
Stalin: Do you expect a crisis?
Stassen: I believe we can
regulate our capitalism and stabilize our production and employment at
a high
level without any serious crisis. . . .
Stalin: The Government must be
vested with wide powers to accomplish that. . . . Magazine analysts and
the
American press carry open reports to the effect that an economic crisis
will
break out.
Stassen: . . . The problem is one
of leveling off at high production and stabilizing. . . .
Stalin: The regulation of
production?
Stassen: The regulation of
capitalism.
Stalin: But what about
businessmen? Will they be prepared to be regulated?
Stassen: No. Some will have
objections.
Stalin: Yes, they do. ...

The
influential Soviet economist Evgenii Varga, in his 1946 book suggested
that the
increased role played in the economy by the governments of the Western
capitalist states might make possible the emergence of a limited form
of
economic planning in those economies after the war. With such planning,
Varga
contended, these economies might be able to avoid economic crises of
the type
that had caused the Great Depression in the 1930s.(See my June 13, 2002 AToL article: National
Planning and
the American Myth)

The
implication was that Western market economies would be stabilized by
adopting
aspects of war planning in peace time, using an enlarged public sector
to
counterbalance the volatile business cycle. Such views coincided with
those
expressed by Joseph Schumpeter’s 1942 work: Capitalism,
Socialism and Democracy. and later given further analysis by Hyman
Minsky’s
work on financial instability.As
Western capitalist powers adopted mixed economies, they would be less
aggressive against communism. Consequently a moderate Soviet policy of
cooperation with the Western powers might pay large peace dividends fro
the
whole world.

Varga’s
contention that US
confidence in its capitalist economy would reduce US
aggressiveness against communism was obvious wishful thinking, given
the
ideological wind of the Truman era. As it turned out, the enlarged
public
sector in the US
was mostly concentrated in defense spending. Still Varga’s prediction
that
market capitalism would be saved through planning and Keynesian
intervention
held for half a century until the US
went on a wholesale market deregulation binge in the Reagan era.

The
credit crisis that began in August 2007 appears to be spinning out of
control
with a high probability that financial capitalism will be drown by
excessive
debt beyond the power of the government to rescue. How this mess will
finally
play out over the course of the next few years is hard to predict
because of
the uncertainty of government policy and action. One thing is certain:
when the
dust finally settles, the global economy will be fundamentally
different from
what it was before 2007.In many ways,
countries with emerging economies such as China,
India
and Brazil,
can affect the shape of the new global economy if their leadership have
the
wisdom and creativity to forge a new direction, instead of continuing
to play
passive supporting roles to a dying system.

In
the latter part of 1947, once confrontation had come to dominate
Soviet-US
relations, Varga would be publicly criticized in the Soviet press and
forced to
recant this views which by then no longer comported with the thrust of
Soviet
response to hostile US
posture. But in April Stalin in his conversations with Stassen was
merely
gathering information from a high US
source to confirm his impression that despite some economic
difficulties, the
Western economies were not on the verge of collapse, nor was it moving
towards
a mixed economy. The lack of progress at the December 1945 Moscow
conference to
discuss occupation of Germany, peace establishment, and Far East issues
signaled only that Stalin was holding out for a better deal on Germany,
primarily on reparations, and not to start a Cold War.

In May 1948, Moscow
tried to counter the creation of the Organization for European Economic
Cooperation (OEEC), which was the institutional embodiment of the
Marshall
Plan, by proposing the establishment of “a committee for the
development of
economic relations between European states” under the auspices of the
UN
Economic Commission for Europe. OEEC later
became an
international organization of some thirty countries, some outside of Europe,
that accept the principles of representative democracy and free market
economies with the name Organization of Economic Cooperation and
Development
(OECD)

In the fall of 1948, the debate among Soviet academic
experts about the imminent general crisis of capitalism was about
Soviet policy
on where the US-dominated Western bloc was heading and what Soviet
response to
its likely development ought to be. The USSR
in January 1949 inaugurated the Council for Mutual Economic Assistance,
later
known as Comecon.The Eastern
European
officials invited for the occasion, Soviet leaders suggested Western
European
allies of the US,
particularly Italy
and France,
could be pulled loose from the US
if they were pit in a position of critically dependent on the Soviet
supply of
raw materials. In 2008. the European Union, dependent on Russia
for 34% of its imported oil and 40% of imported gas, did not venture
beyond
verbal condemnations over Russian invasion of Gerogia.

Soviet planners thought that the Comecon, by creating a raw
material base for the whole of Europe would
become more
important than the Cominform, theofficial forum of the
international
communist movement since the dissolution of the Comintern. Cominform
was
founded in September 1947 in response to divergences among eastern
European
governments on whether or not to attend the Paris Conference on
Marshall Aid in
July 1947. Stalin
was quoted as saying that he
“does not attach much importance to military matters,” as he saw little
probability of war in the next 8-10 years.Stalin’s
prediction was wrong. Five years
later, in 1951, the Korea War
was started by US
client state South Korea.

Russia
viewed the end of the Cold War not as the beginning of a new equitable
world
order of peace and prosperity for all, but a world dominated by a US
driven by a philosophy of confrontation with the assumption that it is
empowered
by destiny to do anything it wants.Now Russia,
boosted by its energy leverage drawn from a commodity price structure
largely
engineered by US
policy, is pushing back by copying US
post-Cold War unilateralism. In marching into Georgia,
Russia
did not
bother to seek United Nations diplomatic cover. Topping the list of
Russian
grievances with post-Cold War US aggressiveness is the expansion of
NATO to Russia
sphere of influence and the planned basing of a US
anti-missile system in former Soviet satellites Poland
and the Czech Republic.
“In their eyes, this is payback time,” admits Jack Matlock, former US
ambassador to the Soviet Union during the
Reagan
administration. “We have set some very bad precedents for Russia.”

The US
system of relying on private defense contractors was in a better
position to
reap economic benefits from nuclear and conventional armament than the
Soviet
system of state enterprises. The strategy to bankrupt the USSR
with arms spending was essentially the one which Ronald Reagan employed
to win
the Cold War. But the key factor for Soviet economic failure was its
decision
to engage Western capitalist markets denominated in dollars, which the US
could print at will after 1971, while the USSR
had to earn through trade. By joining Western markets, the USSR
found it increasingly difficult to fund with socialist sovereign credit
denominated in rubbles its share of the arms race with the US.
After the Soviet leadership allowed the Soviet economy to fall into the
trap of
needing dollars to achieve Soviet planning goals, it was a matter of
time
before the socialist system in the USSR
would collapse.

Ironically, the fall of the USSR
launched the US
on a path of national hubris divergent from its core national interest.
In
1951, Hans Morgenthau published In
Defense of the National Interest in which he warned US policymakers
about
confusing two important issues: Russian imperialism and genuine
revolution.
“American foreign policy ought not to have the objective of bringing
the
blessings of some social and political system to all the world or of
protecting
all the world from the evils of some other system. [...] If we allow
ourselves
to be diverted from this objective of safeguarding our national
security, and
if instead we conceive of the American mission in some abstract,
universal, and
emotional terms, we may well be induced, against our better knowledge
and
intent, yet by the very logic of the task in hand, to raise the banner
of
universal counter-revolution abroad and of conformity in thought and
action at
home. In that manner we shall jeopardize our external security, promote
the
world revolution we are trying to suppress, and at home make ourselves
distinguishable perhaps in degree, but not in kind, from those with
which we
are locked in ideological combat....”

It is not an exaggeration to note that much of the national
security problems faced by the US
after the end of the Cold War were created by US
policy.

The Issue of
Ownership of the Means of Production

The defining characteristic of a socialist system is the
public ownership of the means of production. Karl Marx observed that
the
historical-cultural pattern of the ownership of the means of production
(OMP)
gave rise to the social phenomenon of class and the politics of class
struggle.
Membership in either class, bourgeoisie of proletariat, is defined by
the
individual’s relationship to the means of production. When workers,
through
their pension funds, participate indirectly in OMP as shareholders,
they become
members of the petite bourgeoisie. Self-employed professionals
are also
members of the petite bourgeoisie, even as they are increasingly
corporatized.
For a market system to remain balanced, the public sector needs to be
dominant.

Hyman Minsky pointed out in his 1996 paper: Uncertainty
and the Institutional Structure
of Capitalist Economies that capitalism is an ever-evolving
construct that
recently entered a new stage: money manager capitalism. In this form of
capitalism, nearly all businesses are organized as corporations;
pension and
mutual funds are the predominant owners of financial assets; and
managers of
these funds are judged solely on the total return on fund assets
(dividends and
interest plus appreciation in share value). One consequence of the
money
manager structure is predominance of short-run considerations in
decision
making. A robust public sector is needed to rebalance excessive
uncertainty in
the private sector.

Two important points need to be borne in mind in understanding the
concept of Ownership
of the means of production (OMP). The first point is that private
ownership of
the means of production is more than owning physical and intellectual
property,
or owning the financial capital behind it. The second point is that
private ownership
of the means of production in a capitalist system refers to a
socio-cultural
practice in which a small number of individuals within a larger
corporation,
namely shareholders represented by the board of directors, operating
under the
capitalist law of private property rights and the sanctity of contracts
as if
the corporation were one single individual, can control and decide what
is done
with all the profit created by the entire corporation composing also
largely of
workers who are legally disfranchised of their economic rights merely
because
they do not own the means of production. As represented by
management
under the supervision of the board of directors, these absentee owners
of the
means of production do not have anything to do with the operation of
the corporation
besides ownership of its capital. When corporations make good profits,
only
their management and shareholders benefit. Workers are paid a fixed
wage and
generally do not receive bonuses based on profit earned by the
corporation that
employ them. This may be legal and appear fair under the doctrine of
private
ownership rights, but it is the fundamental injustice of capitalism.

While shareowners of a corporation, members of the bourgeoisie class by
definition, contribute only financial capital that enhances the
productivity of
workers, and workers, members of the proletariat class, produce the
profit,
shareholders command complete legal control over that profit and how it
is used
and distributed. The owning bourgeoisie have complete legal control
over both how
much the working proletariat are paid in wages and complete legal
control over
how the profit from worker productivity is used, thus giving rise to a
class
division. In Chinese political nomenclature, the term bourgeoisie
stands
for the “propertied class” and the term proletariat stands for the
“property-less class”. The politics of class struggle is a battle
between
uneven power commanded by capital and labor. Under a central banking
regime in
a market economy, non-inflationary monetary policy requires the
maintenance of
“structural unemployment”, thus systemically weakening the bargaining
power of
labor against capital, unionism or no unionism.

Charles Dickens wrote on the inhumanity of capitalism as a
natural outcome of the industrial revolution to promote reform. But
Marx and
Engels wrote on the structural contradiction of capitalism to show that
even if
workers were treated more humanely by capital as an enlightened
utilitarian
necessity, capitalism will still not escape collapse from its internal
contradiction.
The introduction of meta-wage benefits via pension funds turns
classical
capitalism into mass capitalism, making workers simultaneously into
their own
oppressors through a system that allows capital in the form of
labor’s own
retirement savings to continue to oppress labor. The search for high
return on
workers pension funds is pushing wages down everywhere in the
globalized
economy and relocating jobs from high-wage economies to low wage
economies. The
neoliberal name for capitalism is market economy. The concept of a
labor market
is merely a modern version of slavery.

Capitalist bias not withstanding, labor is not a factor of production.
It is
the core component in the economy around which factors of production,
such as
capital, land, technology, organization, etc., are applied to increase
labor
productivity. Marx considered it a reification to treat labor
as just
another factor of production. Workers are people who should not be used
as
things, with profit they create extracted to benefit solely others who
own
things that workers use to be more productive. Return on capital should
not be
achieved through robbing labor of its fair share of the fruits of
workers’
labor.

Profit should only be realizable pari
passu with wage increases. As corporate revenue rises, wages must
rise with
it to prevent obscene profits. Rather, corporate profit should be
shared with
labor in the form of wage bonuses along with dividend to shareholders.

Privatization of the public sector is an abdication of government
responsibility to the governed. It is economically unsound, financially
inefficient and socially unjust when national public infrastructure,
either
physical or social, are privatized. The public sector is not merely
another
component of the national economy. It is the critical component
that
defines the limits of the globalized market in a functioning sovereign
state.
Economist Hyman Minsky pointed out that a sizable and strong government
sector
is indispensable for a capitalist market economy to maintain
macroeconomic
stability and avoid recurring deep recessions. In a globalized economy,
national public sectors are necessary to maintain global macroeconomic
stability.

Privatization of the public sector exposes the capitalist
market economy to cyclical disasters that require nationalization
measures to
bail out, as the recent collapse of the finance sector of the US
economy aptly illustrates. Even in the boom phase of the business
cycle,
privatization of the pubic sector drives socio-economic resources and
development to where there is highest profit rather than where the
nation’s
most critical needs are located. The nature of private finance is such
that
privatized public enterprises are forced by market pressure to focus on
the
short term, often leading them toward long-term problems and even
insolvency.

Privatization of the public sector provides needed public
services only to those who can afford them rather than to all who need
them as
a matter of rights of citizenship. The dilemma over universal health
care and
insurance in the US
is an obvious example. The market by its very nature rewards the
financially
strong and punishes the financially weak, in opposition to the function
of
government to protect the weak from the strong. The market is the
venue
of choice for owners of capital, notwithstanding that the market value
of
capital is basically defined by state actions, such as monetary policy,
interstate trade and antitrust regulations, tax policies, and above all
by the
productivity of labor.

Fundamentally, capital is merely idle asset when deprived of the
opportunity to
invest in enhancing the productivity of labor. Capital is merely an
auxiliary
factor of production. Without capital, labor can still produce, albeit
at a
lower productivity rate, but without labor, capital cannot exits. This
is why
capital, when allowed to move freely, tends to go to where workers are
and
where worker productivity is underdeveloped. This fundamental truth is
often
distorted by the supporters of capitalism who promote the flawed
concept that
capital is the driving force in a capitalist economy and therefore must
be
given preferred advantage or it will move to another economy that does.

Dollar hegemony operating on a globalized trade regime
pushes capital to where wages are lowest without any intention of
developing
global parity in worker productivity. The sole aim is to maximize
return on
capital with lowest wages. For centuries, capitalism prospered
because it
enhanced labor productivity that yielded rising wages. For the last two
decades, free market capitalism has worked to drive wage down
throughout the
global economy, a trend that will spell self destruction.

Further, just as the rich can enjoy a life of riches only if they
control
money, but not when money controls them, an economy can prosper only
when its
workers control the capital needed to enhance their productivity. It is
a very
American idea that workers should be able to become rich by their
labor, an
idea deeply rooted in the founding of the new nation. The founding
fathers of
the United States
considered the concept of financial capital unnatural and an unholy
obstacle to
the inalienable right of the pursuit of happiness.

The US Declaration of
Independence issued on July 4,
1776, states that to secure “inalienable rights”,
among which are life, liberty and the pursuit of happiness,
“governments are
instituted among men”. It goes on to accuse King George III of England
of having “abdicated Government here, by declaring us out of his
Protection”.
The declaration characterizes England
as a failed state and justifies the separation of the American colonies
from it
to institute a new government. Yet privatization, a movement to
abdicate
government by declaring the people out of the government’s protection
and
placing them at the mercy of the market, has since gathered much
ideological
support in the name of liberty.

Operationally, the public sector performs a stabilizing effect on
volatile
business cycles inherent in the private sector market. Private sector
market
participants can then be allowed to fail from their own business
misjudgments
without the risk of bring the entire economy down because the public
sector can
keep the economy going while orderly market correction takes place in
the
private sector. The “too big to fail” syndrome would be less likely to
surface
amongst private enterprises. If Fannie Mae and Freddie Mac had remained
government entities, and not privatized, with the original mandate to
provide
government subsidies to low- and moderate-income families not
overridden by
profit incentives and the income ceiling for qualifying for government
guaranteed
mortgages not amended beyond low- and moderate-income levels, the
housing
bubble crisis of 2007 would have been less systemic.

Transnational investment banks and private equity firms such
as Goldman Sachs, Blackstone, the Carlyle Group, Merrill Lynch, Morgan
Stanley,
etc., are eager to pounce on juicy privatized public assets such as
infrastructure projects worldwide.But
privatization of the public sector (the sale or lease of public assets)
means
governments will be relinquishing control over and responsibility for
key
infrastructure for the common good for the term of the sales. It
usually also
means higher fees for users, since private borrowing tends to be more
costly
than sovereign credit, and investors always insist on taking their
profits off
the top from gross revenue, thus increasing user fees and reducing the
cost-competitiveness of those users depending on such infrastructure
for
efficient operation. And rising user fees seldom translate into
improved
service. To the contrary, surveys have shown that in-house operation of
publicly-provided services is generally more efficient than contracting
them
out to private operators, while privatizing public infrastructure for
private
profit has typically led to increased inefficiency and corruption.
State-owned-projects can keep user fees to a minimum and recoup public
investment from increased tax receipts generated by economic growth.
Many
counterproductive cases are cited in a large body of work on
privatization,
including my article: The
Privatization
Wave. Much of the blame for the current housing credit crisis can
be laid
at the footstep of the privatization of government sponsored agencies,
namely
Fannie Mae and Freddie Mac.

Privatization of the public sector in China
is not simply the benign transfer of ownership from the state, as a
political
institution representing all the people, to corporatized entities
controlled by
private financial institutions and private individual shareowners.
Rather, it
is the very process by which the system of private property is
reintroduced
into the public sector a socialist society in the process of
transitioning to a
socialist market economy. This involves fundamental questions about
social
justice in ownership distribution, valuation of assets being
privatized, and
the fairness of the privatization sale process of state-owned assets.

Privatization for transitional economies requires not only
the restructuring of the economy but also the creation or redefinition
of
private property rights and market institutions and mechanism while
ensuring
maximum economic growth with minimum socio-economic and political
disruption.
Above all the issue of social justice needs to be a controlling
consideration.

Ronald Coase, 1991 Nobel Laureate in economics, developed the Coase
theorem in
his 1937 paper describing the economic efficiency of financial
allocation in
the presence of externalities.Externality
in economics involves impacts on
parties not directly
engaged in economic decisions or actions, or in plain language: the
spillover
effect. Externality in finance occurs when others besides the actors
must pay
for the cost or share the benefits of a decision, action or
transaction. The
theorem, clarified in his 1960 article: The
Problem of Social Cost, states that when trade in an externality is
possible with no transaction costs; bargaining will naturally lead to
an
efficient outcome regardless of the initial allocation of property
rights. By
extention, given well-defined property rights, low bargaining costs,
perfect
competition, perfect information and the absence of wealth and income
effects,
resources will be used efficiently and identically regardless of who
owns them.

The Coase theorem has been cited as a basis for most modern
economic analyses of government regulation. According to Coase,
disputes over
resources stem mostly from a situation where no one owns them, as in
the case
of nature, or everyone owns them, as in the case of public property.
However,
these disputes could be resolved automatically if
the unclaimed resources were divided up as private property,
even if the division contain inherent unfairness.

This is the basic argument used by those promoting
privatization of the public sector. They view the problem of air
pollution as
no one owning the air, or everyone owns it. The same argument applies
to water.
If these natural resources were privatized, economic efficient over
their use
and preservation would improve, these privatizers argue. But the nature
of the
economic man is such that whoever is assigned to own the air would
rather
charge others for permission to pollute it than to pay everyone else to
stop
polluting it. Privatization of air would then end up promoting air
pollution for
profit.

Another obstacle to applying the Coase theorem is the wealth
and income effects. This
is defined as the change of wealth or
income that occurs when public property or property rights are awarded
unevenly
to private parties. Coase made his “invariance claim” that outcomes
will be
similar of not identical regardless who the favored owners are. But
effects of
wealth and income disparity on equality and social stability are
ubiquitously
obvious enough to invalidate the Coase theorem. Coasians argue that the
social
results may be different, but they will be equally efficient
economically. The
problem with this argument is that changes in supply and demand caused
by
different ownership patterns have rippling effects throughout the
entire
economy that affect efficiency. And even if efficiency is unaffected,
social
stability will certainly be affected that will in turn affect economic
efficiency.

History has shown that no national resurgent strategy can
succeed without a clear understanding of the importance of a viable
monetary
strategy for successful independent national development. Chinese
monetary
strategy in recent decades has been reactive, lacking political will to
take
the initiative and playing a game in ways that show her policymakers as
not having
full understanding or the necessary skills to control the outcome,
despite the
fact that China
has become the world’s biggest creditor nation and the top
manufacturer. China
cannot continue to allow her currency to be a derivative of the dollar;
nor can
she rely on foreign trade surplus denominated in dollars to finance
much needed
domestic development. China
must stop further privatization of her public sector, stop exposing her
strategic sectors to international market forces and take steps to
reverse the
disparity of wealth and income and free up sovereign credit to develop
much
need physical and socio-economic infrastructure at a much faster pace.
After
three decades of reform and open-up to the outside world, Chinese
policymakers
should realize its time to review and redirect toward new approaches of
national revival not merely to catch up with a decadent West, but to
restore
Chinese civilization as the guiding light towards a world free of
exploitation
and oppression.